High Compensation Creates a Ratchet Effect
Consider a firm which pays a (credit-constrained) worker for his effort over two periods. The more the firm pays in one period, the wealthier is the worker in the following period, and so the more he must then be paid for a given effort. We describe the profit-maximising contract under these conditions, showing how this wealth-ratchet effect can raise wages over time, and cause the firm to fire older workers. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.
Year of publication: |
2009
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Authors: | Gersbach, Hans ; Glazer, Amihai |
Published in: |
Economic Journal. - Royal Economic Society - RES, ISSN 1468-0297. - Vol. 119.2009, 539, p. 1208-1224
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Publisher: |
Royal Economic Society - RES |
Saved in:
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